Birth of a Market: The US Treasury Securities Market

from the Great War to the Great Depression (MIT Press 2012) by Kenneth D Garbade

Kenneth Garbade, a senior vice president at the Federal Reserve Bank of New York, has written extensively on the development of the market for US Treasury securities, including at least nine single- or co-authored articles (most of which appear in Economic Policy Review).

And as the nine page bibliography attests, he has delved deeply into the relevant sources. Garbade’s extensive scholarship qualifies him as one of, and most likely the, preeminent analyst of the rise of that market. In Birth of a Market, Garbade not only pulls together his earlier work but extends it.

Garbade describes his project as tracing “the development of the Treasury market from a financial backwater prior to World War I to something reasonably familiar to a current observer on the eve of World War II”. He shows how three of the four key pillars of the modern Treasury market originated in the period between the end of World War I and the start of World War II.

These include the “regular and predictable issuance, auction offerings aimed a wide spectrum of market participants, and the Treasury Tax and Loan system”. Garbade’s prose is concise and clear, explaining each stage along the path with the aid of ample charts and tables. While certainly not light beach reading, Birth of a Market is eminently readable.

An excellent example of Garbade’s analysis is his discussion of America’s finance of its participation in World War I. Prior to the war, the American Congress saw Treasury debt as a means to finance particular projects. This changed dramatically when the United States entered the First World War. As Garbade notes, “the course of the war drove everything else”. Faced with the need to quickly raise vast sums to create and equip an army to fight in Europe, the US Treasury recognised that it had to fund the war from domestic sources as every major industrialised power was already involved and so foreign finance was impossible.

Although the Wilson Administration dramatically increased income tax burdens (increasing the top rate of “surtax” on income from 13 per cent on incomes over $2,000,000 in 1916 to 65 per cent on incomes over $1,000,000 in 1918, President Woodrow Wilson and Treasury Secretary William McAdoo also sought to finance a significant amount of the war via debt. The new taxes brought in just $7.7 billion in revenue and the war expenditures were more than $32 billion. The US government ultimately raised $21.4 billion from five, fixed price “Liberty Loans”. Rather than auction notes, the government opted for fixed price securities to be sold to the public through mass campaigns.

These loans enabled Wilson and McAdoo to shift the cost of the war forward in time and away from the wealthy onto a broader segment of the population. Perhaps that segment of the population had an inkling of this, for the government resorted to “intense pressure” to sell the bonds. Garbade quotes Secretary McAdoo announcing “Every person who refused to subscribe or who takes the attitude of ‘let the other fellow do it,’ is a friend of Germany and I would like nothing better than to tell it to him to his face . . . . A man who can’t lend his government $1.25 per week at the rate of 4 per cent is not entitled to be a citizen.’” (p101)

The loan program itself “exhibited a level of ingenuity and a willingness to experiment not typically associated with a sovereign issuer”. (p85) Garbade excels at dissecting the terms of bond issues and his discussion of the Liberty Loans is impressively thorough. On the issue of coercion, he not only marshals quotes like McAdoo’s and contemporaries’ assessments but also data on comparable investments and secondary market yields on the bonds. He concludes that the first and third Liberty Loans paid roughly market rates of interest, while the second and fourth were sold at below market rates.

After the war, the debt went from something to be paid down to a permanent feature of the landscape that required management. This led the Treasury to return to auctions in 1929 to handle ongoing refinancing needs. It also prompted Congress to cede most details of debt management to the experts at Treasury, retaining only the authority to set the overall debt ceiling (an issue which will come to ahead once again in a few months). This shift to permanent debt management from project finance marked a major change in the US government’s role in the economy and Garbade excels at dissecting its origins in a sequence of policy decisions.

Birth of a Market concludes with a brief (p33) summary of Treasury debt management since 1939. I hope this signals an intent by Garbade to continue his historical work and bring the story up to modern times. There is certainly considerable material in this brief section that warrants more detailed analysis. As he notes, “the United States never paid down any significant fraction of the debt incurred in the Second World War.” (p338) This was offset by regular inflation and substantial economic growth, reducing the ratio of Treasury indebtedness to aggregate national production from 1.2 in 1946 to 0.3 in 1981. It has risen since.

In addition to tackling the post-World War II period, I hope Garbade, or someone inspired by him, takes on the equivalent task for European public debt. With sovereign debt problems roiling markets in Europe and the European Union bouncing from solution to solution as it seeks a path out of perpetual crisis, it would be helpful to understand the origins of public debt markets there as well.


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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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